When Financial Institutions are Large Shareholder: The Role of Macro Corporate Governance Environments

49 Pages Posted: 2 Oct 2008

See all articles by Donghui Li

Donghui Li

UNSW Australia Business School, School of Banking and Finance

Fariborz Moshirian

Institute of Global Finance, UNSW Business School

Peter K. Pham

University of Sydney Business School; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Jason Zein

UNSW Business School; Financial Research Network (FIRN)

Abstract

While financial institutions' aggregate investments have grown substantially across world equity markets, the size of their individual shareholdings, and ultimately their incentive to monitor, can be limited by the free-rider problem, investment regulations and a preference for diversification and liquidity. We compare institutional shareholding patterns across countries and find vast differences in the extent to which institutions are large shareholders. More importantly, we find that after controlling for regulations and characteristics of the institutional investment industry, these variations are determined by macro corporate governance factors such as shareholder protection, law enforcement and corporate disclosure requirements. Our results suggest that strong macro governance environments act to strengthen intervention ability and reduce monitoring costs such that more institutions are encouraged to hold concentrated equity positions. Overall, our results highlight a link between the 'Law and Finance' and 'Institutional Activism' streams of literature.

Keywords: Corporate Governance, Institutional Activism, Law and Finace

JEL Classification: G30, G20

Suggested Citation

Li, Donghui and Moshirian, Fariborz and Pham, Peter Kien and Zein, Jason, When Financial Institutions are Large Shareholder: The Role of Macro Corporate Governance Environments. Journal of Finance, Vol. LXI, No. 6, pp. 2975-3007, December 2006, Available at SSRN: https://ssrn.com/abstract=921963

Donghui Li

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Fariborz Moshirian

Institute of Global Finance, UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855859 (Phone)
+61 2 94877519 (Fax)

Peter Kien Pham

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9036 9103 (Phone)
+61 2 9351 6461 (Fax)

Institute of Global Finance, UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jason Zein (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93855858 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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